Bumpy ride in the markets

The markets have been as bumpy as the Alaska Highway around Burwash over the last few months. 

The markets have been as bumpy as the Alaska Highway around Burwash over the last few months. Investors have had that feeling in their stomachs that you get when you hit a frost heave and wonder if your axles will still be attached when the truck lands.

More recently in this month, the charts look like that long seemingly endless downhill after Steamboat Mountain.

Toronto’s S&P/TSX composite index was over 15,500 in April. It closed at 12,822 last Friday. That’s a drop of nearly 20 per cent, enough to turn dreams of early retirement into fears that you’ll eventually be googling the seniors employment program at Krusty Burger.

Meanwhile, in New York, the S&P 500 index was over 2,100 in April and finished last week at 1,940. That’s almost 10 per cent. The fact that this is a less severe sell-off than Toronto isn’t much of a consolation.

But these are just potholes compared to the TSX global mining index, whose chart looks more like base-jumping than driving the Alaska Highway. Back in 2011, this hit 128. Last Friday it was 41.

In other words, $100 invested in this index back in 2011 would now be worth $32.

Your best investment might be the crumpled U.S. dollar bills you forgot in the bottom of your beach bag after your last trip to Hawaii. They’re up 40 per cent over the last three years.

No one likes to log onto their savings fund account and see these kinds of numbers. But it’s important to keep this kind of event in perspective. If you’re a long-term investor, in a few years you probably won’t even remember this month. Looking at the charts going back to the 1970s, there are lots of up and downs that were painful at the time but didn’t interfere with long-term value creation.

Remember when the Toronto market fell 20 per cent from April to September 2011?

Exactly.

It had recovered the drop by early 2014.

Of course, there is no guarantee the same thing will happen this time. But the episode is a reminder that probably every pothole does not warrant a radical change in your investment strategy.

I spoke to one Whitehorse saver who happened to meet with her investment advisor on one of the worst days in January. After reviewing the carnage, she bought preferred shares in one of the big banks and some units in a low-fee market-tracking index fund. Within a week she was up 12 per cent.

The point here is not actually that she cleverly timed the drop. Despite the stories you hear, this is actually extremely difficult to do. Plenty of pros have lost millions trying.

What is more important is that she has some long-term investment goals and a sensible set of relatively low-risk investments. This is not trying to buy Amazon on the drops and sell on the hops. She always invests in her RSP and simply had the good fortune to pick up a few bargains this year.

So what are the kind of sound investment principles a person should keep in mind?

First of all, if you are going to need the money in the next year or two, you probably shouldn’t be in the stock market. If you are saving up to make a down payment, pay for university or similar big ticket items, you don’t want to have 20 per cent of your savings vaporize just before you have to write the cheque. Cash, conservatively-managed money market funds or GICs are the things to think about.

But suppose you have a longer time horizon, such as saving for retirement or starting a Registered Educated Savings Plan for your newborn child. In this case, and assuming you’ve paid off any major debts, the stock market can make a lot of sense. Over the long run it tends to have higher returns than bonds or cash. That’s a long run trend, and there’s always a risk that the next few years will be different. Cash may seem safer, but keep in mind most cash investments these days pay less than the rate of inflation. This slowly saps the purchasing power of your savings instead of growing it.

You should speak to your advisor about how to complement equity investments with the suitable long-term bonds and cash. But equity will likely make up a big portion of your nest egg if you’re investing for the long term.

You have lots of choices here, probably too many choices. I try to ignore people talking about making big wins in tech stocks or junior mining companies. Being a boring investor is good in my books. I like low-fee index funds and boring blue-chip dividend stocks.

Keeping an eye on fees is important. Consider the difference between a mutual fund that charges a two per cent annual fee versus a mutual fund such as SPY, which tracks the S&P 500 index and only charges 0.09 per cent. If you invest $1,000 in each, and say both average a six per cent gain per year over 25 years, then the mutual fund will give you $2,666 while SPY would yield $4,202. That shows you much the fees add up over the years.

Of course, the mutual fund’s marketing department would point out that they have a lot of smart people trying to beat the market. But you might ask them how many mutual funds consistently out-perform the market in the long run.

As for the stocks, you can do worse than owning a boring old bank or telephone company. The dividends are often in the decidedly unspectacular 2-4 per cent range. But no matter what bumps in the road the stock market hits, the cellphone towers and bank branches keep pumping out the profits for you (barring what economists call a “black swan” event). These are still riskier than cash, but a lot safer than this week’s Internet sensation.

So what should you do? Well, first of all do your research and get advice from someone you trust and who knows what they’re doing. Keep saving steadily and surely for the future. And it might even be a good idea to check your online account balance less often.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He won this year’s Ma Murray award for best columnist. You can follow him on Channel 9’s “Yukonomist” show.

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